NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Information Technology Spillovers

"Increasing IT investment in manufacturing industries by one percent increased supplier investments by 0.6 percent, and customer investments by 0.3 percent."

Evangelists for the computer revolution predicted that rapid advances in information processing technology would create a new economy. Vastly increased computing power would revolutionize working arrangements, leading to previously unmatched improvements in productivity and a new age for consumers. But actual evidence of the benefits flowing from roughly two decades of massive investment in information technology has accumulated more slowly.

In Information Technology Externalities: Empirical Evidence From 42 U.S. Industries (NBER Working Paper No. 9272), authors Sung-Bae Mun and M. Ishaq Nadiri measure the benefits that accrue to suppliers and customers when a specific industry invests in information technology (IT). Across the industries they examine, the value of IT equipment, computers, software, and data input, output, and storage devices, was 9 to 10 times larger in 2000 than in 1984. Service industries - such as wholesale trade, the finance sector, and business services -- had the largest IT investments.

About three fourths of the industries examined received more spillover benefits from the IT capital of their suppliers than their customers, as would be the case when a computerized supply chain lowers inventory costs. On average, a 1 percent increase in IT investments in manufacturing industries reduced the labor intensity of their suppliers by 0.01 percent. In the long run, investment in IT appears to have propagated through the supply chain. Increasing IT investment in manufacturing industries by one percent increased supplier investments by 0.6 percent, and customer investments by 0.3 percent.

Industries including business services, legal services, and banking and securities differ from manufacturing in that they have customers from a wider variety of industries than most manufacturers do. Unlike less service- oriented industries, these industries appear to have benefitted most heavily from their own IT investments and from the spillovers from the IT investments of their customers. Overall, the authors find that IT investments, and their spillover effects, reduced variable costs in all industries by promoting savings in both labor and materials.

-- Linda Gorman


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